The US dollar is mixed. The buck is currently strengthening against the euro and the British pound, while selling off against the Japanese yen, the Australian dollar and the Canadian dollar. Yesterday, the dollar was down sharply against most major currencies following weaker-than-expected core inflation figures. Thanks to weaker inflation, the Federal Reserve is less likely to signal more rate hikes as a result. Following its recent decline, the US dollar is no longer looking overbought.
Looking at economic conditions more broadly, US growth and inflation remain high. While inflation is likely to continue accelerating, the outlook for US growth is less benign. Thanks to 2.9% year-over-year growth in the previous quarter, risk sentiment is still supportive as indicated by recent gains in US equity markets. Over the coming weeks, we expect US economic data to deteriorate thanks to both base effects and the impact from a broader slowdown around the world. While expectations for rate hikes are elevated today, we expect this outlook to gradually change over the coming months. For the US dollar, the outlook remains positive as the currency tends to shine when global growth is decelerating. The real risk is for assets such as equities, European currencies and commodities that are dependent on accelerating growth. Our short-term and medium-term outlook on the dollar is bullish.
USD/JPY is flat today and currently trading above 109.30. EUR/USD is down slightly and trading above 1.190. GBP/USD is flat, and currently above 1.3510.
This week’s US dollar economic calendar includes inflation figures and consumer sentiment. March consumer credit figures ($11.6 vs. $16b expected) were below expectations. FOMC member Bostic said that "some overshoot" on inflation is fine, while Kaplan said that the removal of monetary accommodation should be gradual. Fed Chair Powell said that emerging markets are prepared for further rate hikes, while President Trump pulled out of the Iran deal. The April producer price index (2.6% vs. 2.8% expected) missed expectations while Bostic said that inflation is likely to increase above 2% temporarily. Weekly initial jobless claims (211k vs. 218k expected) were better than expected, while the core consumer price index for April (2.1% vs. 2.2% expected) was below expectations. Later today, we’ll see consumer sentiment for May. Last week, the Federal Reserve kept interest rates on hold and signaled comfort with inflation slightly above its two percent target.